How Financial Advisors Make Money

Apr 12, 2021 David Kennon

Broker or registered representation? Investment Advisor Representative or Fiduciary?   Whew! Why does this have to be so complicated?   Whenever you choose to work with a financial advisor they fall into one of two camps: brokers and fiduciaries. Most people don’t know the difference, but it is important that you do!   Let’s start with broker relationships. Brokers are paid transactionally. If you are working with a broker and they put you into some sort of financial product, they are paid via a commission. If they move your money to another spot later down the road, they get paid again. It’s transactional.   In my personal experience, when working with a broker, people can’t help but think, “Sure, Bob seems like a nice guy and he certainly knows what he is doing, BUT…. is he using this particular product because he’s getting paid more? Is there some sort of financial kickback, lurking in the background, which helped him make his decision?”   In addition, whenever a broker suggests a change to an investment strategy you might say to yourself, “Is he doing this so that he can get paid again? Or is this actually in my best interest?”   Brokers are held to a “suitability standard” which means they are “required to implement an investment strategy that meets the objectives of the investor.” Notice that it doesn’t say, “Brokers have to put you in the absolute best investments for your situation.” It only says that it must at least loosely satisfy what you are looking for.   Am I splitting hairs? Let’s take a look at how fiduciaries must operate under the legal standard: “…the fiduciary standard simply means that the advisor puts their clients’ interests above their own. For example, the advisor is prohibited from making trades that may result in higher commissions for the advisor or his or her investment firm.”   The other big difference is how a fiduciary gets paid. An advisor entering into a fiduciary arrangement with a client is not allowed to receive commissions. Their compensation is not transactional.   Generally, fiduciaries are paid an advisory fee (usually around a 1 percent annual fee) which fosters a professional, long-term relationship versus a limited, transaction-oriented one.   How does the 1 percent fee work? Let’s say at the end of the year, you look at your portfolio’s performance and you see an 8 percent gain. In reality, the portfolio returned 9 percent. Most advisors bill (directly from the account) .25 percent each quarter to total the 1 percent.The fees are completely transparent and listed on your statement.   With a broker, it is difficult to determine their compensation, which usually consists of hidden fees that are difficult to translate.   Why is this important? Because, while working with a fiduciary, you never have to ask yourself, “Why is my advisor choosing this investment vs. that investment? Why is my advisor making trades in my account? Why is my advisor moving my money from one place to another?”   Within a fiduciary relationship, you are inherently on the same team. When you do better, they do better. The more your money grows, the more they make.   I’m not saying everyone needs to be working with a fiduciary. Broker relationships can still be beneficial to some people. But in my own personal experience, client relationships, where I am operating as a fiduciary, seem to be the most productive and meaningful.   So how do you find out if your advisor is acting in a fiduciary capacity? Just ask them!   Be Blessed,   Dave

 

Have You Turned Into Your Parents?

Apr 5, 2021 David Kennon

Are you worried you are going to run out of money during retirement? Do you feel an underlying sense of dread and unease whenever the subject of retirement planning comes up? You’re not alone.   I get pretty passionate when discussing this, because I’ve seen the same weary, anxious look on the faces of far too many good, hard-working people like you. Why is this whole retirement thing so darn scary? You shouldn’t have to live like this!   Retiring Baby Boomers are in the eye of the storm. Several different “fear factors” are converging together, all of them working to ensure you are as stressed as possible about your finances once you retire.   #1 Your parents were alive for the Great Depression. You are a product of your upbringing. You were told to “work hard and save, but never spend a dollar.” If you do spend any money the sky will fall and you will end up eating food scraps in the back alleys of downtown Sarasota.   #2 Pensions are a thing of the past. The golden age of defined benefit pension plans is long gone. No longer are people retiring to the security of a guaranteed pension.   Could you imagine getting a guaranteed union pension that covered all your bills?  Could you imagine knowing you earned a benefit that paid you money as long as you were alive?  Now, it is up to you to plan for your old age.   #3 The financial media is hysterically negative. This irresponsible fear-mongering affects everyone. It is hard to stay calm when a guy, in a suit, on a major TV network, is saying things like, “The worst crash of our generation is coming .”   Without the benefit of my professional expertise, I’d be scared too!   #4 Your “safe” savings choices aren’t working anymore. Interest rates are at historic lows. In the early 2000s you could have found a 5-year CD paying five percent without too much trouble.   But now, we are going on 15 years where CDs, money markets, and other “guaranteed” financial vehicles have been paying less than one percent. In many cases much less than one percent. Right now, nationally, the average interest rate on a savings account is .08 percent.   What does all this mean? Retirees, for the first time, are almost being forced to employ stocks and bonds in their retirement portfolio. What other choice do you have? Most people understand that getting .01 percent of their retirement savings is not the answer.   If you were living in 1981 right now you could walk into your friendly neighborhood bank and put your money into a three-month CD and get around 16 percent interest. Whoa! Who would even consider putting their money in the stock market if you could get 16 percent guaranteed at the bank?   Sadly, we are not living in 1981. But I have amazing news! You do not need to be scared of stocks and bonds. In fact, this unique interest rate environment might “force” you into utilizing the most powerful financial vehicle ever conceived by human kind.   So I want you to be encouraged. The four “fear factors” working against you do not have to sabotage your retirement. With a little bit of education and planning you are going to thrive!   Be Blessed,   Dave   P.S.   So far this year:   Bonds have returned -3.4% Stocks have returned +6.6%   Why do I bring this up?  “Conservative” bond portfolios sometimes lose money too.  That’s why a diversified portfolio of stocks and bonds are always appropriate- no matter your age.

 

Why Would You Tell Your Friends a Secret?

Mar 29, 2021 David Kennon

Everybody has an opinion about which way the market is going to turn.  One group of people I really take issue with are the prognosticators.  The people that come out and say, “Exxon-Mobil is a great buy right now.”  Or, “Our research has found that the consumer goods market for India is about to experience a big economic boom.”   You see this stuff everywhere.  Literally.  Magazines, newspapers, radio, tv, and, of course, all over the internet.  It makes normal people like you say, “this is so complicated.  I would like to invest but I have no idea what to do.”   This is heartbreaking because this perceived complexity is a lie.  Investing is not complicated.   Think about this for a second.   Bob and Jenny Jones rent houses for a living.  They have become extremely adept at finding good opportunities in the area.   So one day Jenny finds a steal.  There is an older home that needs a lot of TLC, but it is located in a growing neighborhood, and the price point is perfect for maximizing rent at the lowest cost to her.   Jenny shows Bob excitedly.  “Let’s jump on this!  Before anyone else finds out.”   So Bob goes on his Facebook page and posts: “I’ve found a great rental house.  It’s located at 450 Main St. and I believe it could be a really great investment.  I’m going to try to buy it before anyone else. You’d be crazy not to buy this thing.  Easy money.”   Does that make sense?  Why in the world would Bob run around telling everyone about this kind of opportunity?  Wouldn’t he want to keep it a secret?  The more people that know about it the worse the opportunity becomes.   Why am I telling you this story?   Let’s say a “super fancy Wall St. guy” goes on TV and says, “We have a strong buy rating on Coca-Cola.  Our research shows that their new initiatives will increase market share across the world.  Of the thousands of stocks we monitor, we feel this is the best buy.”   Why would they tell us this?!   Why would you go around telling everyone about an opportunity?  If these guys think it is so great, why don’t they dump their own money into the stock?  Why don’t they keep all this as quiet as possible?   You don’t see Warren Buffett have a news conference and say, “I am going to buy 30% of Heinz’s outstanding stock in a month.  It is an incredible value.”   Maybe you are thinking, “They are pumping up a stock which they already own.  Maybe they buy the stock first and then tell everyone else about it so the value will increase?”   That is illegal.  Very very illegal.  You don’t mess with the SEC on this one. We are talking long jail sentences.   So maybe these guys are just genuinely trying to help you with information so that you can make better decisions.   Yeah. Right.   Obviously, all of this is a ploy to-you guessed it- make money.   By getting on TV, these guys get the good reputation they need to attract investors, off of which they collect fees.  In fact, many of these guys pay to get on there.  I have been approached to go onto CNBC for a short interview.  It costs over $100,000.  That is how important media exposure can be for Wall St. guys.   Not only that, the networks need to fill airtime, so they can show more commercials, so they can make more revenue.  So it turns into a vicious cycle where the Wall St. guys and networks win.  You lose.   You lose because it plants the seed that you don’t know what you are doing.  It plants the seed that you should be adjusting your investments every three minutes.  You lose because you end up not investing at all- in fear of making a mistake.   Don’t let yourself be manipulated.  Put your money into a diversified portfolio of stocks and bonds and invest for the long term.  When you see one of these fancy guys in a tie of TV, just say to yourself, “I’m on to you.  You’re not going to trick me anymore. The more I watch you the worse off I’m going to be.”   Be Blessed,   Dave

 

Buying Marijuana with Bitcoin

Mar 22, 2021 David Kennon

I am constantly asked, “Can’t we just take the money out of our portfolio when the markets are going down, and then put the money back in, right when it hits the bottom?”   While this may sound like a reasonable plan, in reality it is absolutely impossible to actually accomplish.   No one knows when the market will “hit bottom.” Anyone that says they can time the market is either lying or delusional.   The perils of market timing have been quantified by Dalbar, a highly-regarded financial services research firm.   In a study they conducted from 1995-2014, they looked at what various investments actually returned vs. what average investors actually made. From 1995-2014 (averages): Stocks: +9.9% Bonds: +6.2% Int’l Stocks: +5.0% The Average Investor: +2.5% Inflation: 2.3% That means that the average investor only captured about one quarter of the total return of the stock market. The primary issue the average investor faced? You guessed it—market timing. Investors were switching in and out of funds at inopportune times.   Human beings are emotional creatures. Everyone knows that you should “buy low and sell high” but very few people actually do it. People panic. People make irrational decisions.   You need a plan and you need to stick to it. Stop thinking you can outsmart the markets. You can’t.   I hear all kinds of alternative investment ideas that sound good to some people, and, while I can’t guarantee what will happen in the future, I can’t help but notice a pretty remarkable history of success when it comes to good, old-fashioned stocks and bonds.   It seems we human beings can’t help but try to find the “next best thing.”  Why are we trying to reinvent the wheel?   The wheel is not broken. At all.   During the course of my day-to-day business, I see a myriad of people just like you with portfolios filled with non-traditional investments.   Some Examples:   Marijuana Stocks: You were a product of the 60’s.  You would think there would be a huge demand, right?  It’s not as simple as that.   Problems:  Mutual funds focused on the marijuana industry lost 70% in 2020.  The industry is so new and there are so many unknowns.  Believe it or not, there is an incredible oversupply of cannabis.  Not to mention it is not even federally legal.   Bitcoin:  I have no problem with Bitcoin.  It could become a big player in the global financial markets.  I have no idea.  But the daily volatility is incredible.  It is pure speculation.  You are gambling.   Collectibles: Want to stake your future on classic cars, coins, art, and jewelry? Then this is for you!   Problems: Uncertain pricing, forgeries, doesn’t produce any income, high costs for storage, no consistent track record, no income, limited transparency, high commissions.   Venture Capital/Private Equity: Want to get in on the ground floor of a new business? Do you really like watching the TV show Shark Tank? Then this is for you!   Problems: Illiquid, highly speculative (you could lose all of your money), lack of transparency.   Currency Trading: Want to bet on what direction the dollar is going to trend in relation to the Euro? Have fun!   Problems: Zero sum game, no consistent track record, a short-term trading strategy with no academically provable benefit, wildly volatile.   Shorting the Market: Want to make money when the stock market goes down? Be my guest. But, remember, the stock market has been going up by an average of 10 percent over the past 200 years. It’s kind of like betting on the Detroit Lions to win the Super Bowl.   So what am I trying to say?   A diversified portfolio of stocks and bonds is a strategy with an incredibly long, consistent, and successful track record.   Don’t make this more complicated than it is. Use the wheel. It works. It will get you where you want to be.   Be Blessed,   Dave

 

“Help” is Not a Four Letter Word

Mar 15, 2021 David Kennon

My wife fought breast cancer five years ago. As you can imagine, we learned a lot about a lot of facets of life. She had great doctors, the surgery was grueling, but overall she completed the “process” of battling the disease alive and well.  That isn’t the part of the experience that surprised us the most.   What surprised us was all the help.   When you face a life-threatening illness (with four very young children) certain thoughts run through your mind. “How are we going to make it through this?”   We have some family down here, but they could only do so much. Somehow, we had to balance my wife’s care, and the rest she needed, with the very real-life demands of raising four children.   Then something amazing happened.   People came out of the woodwork to help us. While some were friends before the illness, most were mere acquaintances. Maybe someone we met once or twice. Sometimes we were served by people who didn’t even know us, but knew we were in a time of need.   It was an incredible experience. You don’t know what support is there until you really need it.   So what’s my point? Hardship faced alone is suffering. Hardship faced with help is still hard, but it is easier. I watch people refuse help a lot.   On one occasion, a woman–we’ll call her Debbie—was sitting with me in my office and said, “I poured my life into my kids. I wanted them to be productive, happy adults. I sacrificed so much for their well-being, I guess I neglected myself. I have almost no savings. I’m 68 years old. There aren’t many jobs available to me. I’m still renting my place. I have no place to go.”   Then she said, “At least my kids are all doing well. They seem happy, they all have good jobs and families. In fact, my oldest suggested that they convert the second floor of the garage into a mother-in-law suite. But I can’t do that to my kids. Do they really want their mother getting in the way of things?”   This woman was willing to suffer alone rather than accept help from her daughter, literally one of her closest relationships on Earth. She was also going to miss out on the joyful experience of living near her grandchildren, and the amazing blessing of gratitude when you receive help freely given.   Most people are not providers throughout their lives. Sometimes you have to be okay with being the receiver, rather than the giver. The world is filled with caretakers, ready and eager to help. During my wife’s battle with cancer, we realized that many people in the world are givers. They move through the world actively looking for people in need. And when they find someone they spring into action.   Why, then, do we assume nobody is willing to help? Why do we feel embarrassed and ashamed when we are unable to be the provider? There are people waiting to help you. There is no shame in asking for help. Let the helpers do their job.   During my wife’s trials, we found that many other people with cancer did not get nearly as much help and support. Why? I think one reason is because people are so ashamed to need help that they won’t ever ask for it.   When you are in need, you have to go out there, swallow your fear, and tell people.   Talk to your family, your friends, your church. Get your story out there. Few people will judge you, and you won’t believe the helpers that start coming out from the woodwork. If you try to go it alone, you will struggle.   And let’s go back to Debbie. Were Debbie’s kids upset that their Mom was “coming home?” Doubtful. Her daughter had three kids of her own. She was probably desperate for help. Who cares if Mom doesn’t have any money? That’s not what Mom is about. Mom sacrificed her whole life for her children. Her eldest was probably happy and grateful she could help her mother in return.   Repeat after me: You are not how much money you make. Your value, to your family, friends, community, is not conditional on whether or not you are paying your own way.   My wife comes from the Thai culture, and in that society it is assumed that as people get older, younger generations are there to help. It would be seen as blasphemy to turn away a family member in need. Almost every culture in the world has functioned this way for hundreds of years.   What a liberating concept! All those helpers out there are just waiting for someone like you to express a need. Let them do what they do best. Otherwise the helpers of this world have nothing to do.   Be Blessed,   Dave

 

Will Inflation Ruin Your Retired Years?

Mar 8, 2021 David Kennon

As a 20-year veteran in the financial industry, I’ve been trained, repeatedly, on how to design a retirement financial plan. I’ve come to the conclusion that many of the assumptions present in generic planning software are inaccurate. One common variable which nearly every planning tool emphasizes is the effect of inflation.   Most tools assume a 3 percent inflation rate throughout your retired years. If you do the math, that means that a gallon of milk which costs $5 now, will cost $10 twenty-four years from now.   While a 3 percent inflation rate is a reasonable assumption, it can really throw a wrench in most retirement scenarios.   It stands to reason that if your monthly budget is presently $4000, you can expect for it to be $8000 a quarter century from now.   A little scary, isn’t it? Maybe you should just sit on all of your savings as long as possible so that inflation doesn’t ruin you. You don’t want to spend your nineties living in a cardboard box behind a gas station.   Luckily, I have great news. The fear of inflation is a bunch of B.S. Or more accurately, the underlying assumptions in these calculations are missing one enormously important factor: You will spend significantly less money in your eighties and nineties than you will in your sixties and seventies.   The U.S. Bureau of Labor Statistics found that retirees between the age of 65 and 74 spend 35 percent more money than retirees older than 75.The Government Accountability Office found that Americans spend 41 percent less in their early seventies compared with their late forties.   How can this be? You pay off your mortgage. This is an important variable to consider when designing a retirement budget. If your $1200 mortgage payment is going to end in six years, you need to account for that reduction in required monthly funds. You will spend less on clothing, travel, gas, food, and entertainment. That doesn’t mean you don’t travel or go out to eat. Think about it—you won’t have to buy a new work wardrobe every year or so. You won’t have to pay for your kids to travel with you (if you have them). You’ll still go out, but you may go out less. You will not be buying a new car every few years. Hopefully, in the next ten years there are more public transportation options anyway, so all of us can stop buying a new car every few years! Medical expenses generally do not increase until the end-of-life stage, at which point there can be a small spike in spending. Remember that 90 percent of retirees in America spend less than $2,000 a year on medical expenses while on Medicare. Social security accounts for inflation. Another key factor to remember is that your social security payments will grow with inflation. Social security increases are based on the Consumer Price Index (or CPI). Let’s say Bobby Biggins retired 25 years ago with a monthly social security benefit of $1,000. Today that same monthly benefit would total $1,755.   For 2021, Social Security increased by 1.3 percent for those of you receiving benefits. If you have yet to take social security, the 1.3 percent is still added to your future benefit.   So, to review, as you get older, inflation will increase the costs of goods and services, but this increase is offset by the natural reduction in spending as you age. Social security will take inflation into account when determining your monthly benefit.   So what does all of this mean? For many of you, you may be able to spend more money earlier in your retirement.   Don’t let the online retirement calculators fool you. You may be in much better long-term shape than you realize.   Be Blessed,   Dave   Please forward this article to a friend.  They need the encouragement!  They can get on the newsletter list by going here.

 

Is Your Checking Account Hungry?

Mar 1, 2021 David Kennon

When I take on new clients there are certain rules that I ask them to follow. One of the most important rules is: As soon as you retire, each month you take an income check from your retirement and investment accounts, whether you need it or not.   Here’s a quick example:   Mr. and Mrs. Smith retire with $500,000 in savings. We determine that by utilizing a diversified portfolio of stocks and bonds (with at least half of the money in stocks), it would allow them to withdraw $25,000 a year from their savings. Looking over 200 years of economic history, this is a sustainable and reasonable withdrawal amount.   Now, do Mr. and Mrs. Smith dip into their account whenever they need some money, making sure they don’t go over the $25,000? No.   Do Mr. and Mrs. Smith take all $25,000 at once at the beginning of the year? No.   There is definitely a psychology to retirement spending and I’ve learned, over the past 20 years, that neither of these approaches works particularly well.   If you only dip into your account when you “need to,” most people find it to be a painful experience.   Remember, you are children of Depression-era parents. To many of you, withdrawing money from your retirement savings can conjure up thoughts like, “I hope this isn’t a mistake. I hope I don’t run out of money. This feels so irresponsible. This money doesn’t even really belong to me, it belongs to retirement.”   What about taking the $25,000 all at once? While this is a better option than above, I’ve found that generally speaking, human beings live their financial lives on a monthly basis. Most, if not all of your bills are due monthly. You’ve been getting paid monthly or bi-weekly your entire life. It can be difficult to budget a $25,000 lump sum to last the entire year.   After years of in-the-trenches financial planning experience, I’ve determined the best strategy, by far, is to receive income checks on a monthly basis. In the example above, Mr. and Mrs. Smith take their $25,000 over 12 months (around $2000/mo).   This not only allows you to know exactly how much money you can spend in any given month, but it also takes away the pain of withdrawing money from your retirement savings “as needed.”   For whatever reason, when human beings see their checking account growing as the investment income checks roll in each month, they treat that money differently than if it was still in their retirement savings accounts.   Think about this for a second. If you had $500,000 in your retirement savings and that account grew to $525,000 during the year, you might say to yourself, “Oh, that’s nice. At least the money is growing.” And then you go about your day and probably don’t think much about it.   But if that $25,000 ended up in your checking account, you might say, “Wow! This is awesome. Instead of me working, my money is working for me. It’s like I’m getting a ‘paycheck’ for doing nothing! How am I going to spend my money to make my retirement more awesome?” As you can see, these are radically different experiences of the same investment result.   And don’t forget, the central tenet of the Retirement Revolution is you need to spend the money you receive. You are not going to end up like the majority of Americans who are dying with significantly more money than they’ve ever had before in their lives.   You are going to live an empowered and fulfilling retirement armed with the knowledge that you are spending exactly the right balance between too little and too much.   So if, as you are receiving your monthly investment income check, you find yourself saying, “I had better stick this money in the bank and save as much as I can. I sure don’t want to outlive my money.” Stop!   Spend. The. Money.   I’m not telling you to become materialistic. I’m not telling you to buy stuff you don’t really want or need. I’m telling you to live your life with a sense of opportunity and openness to reinventing yourself during your retired years.   So get those checks rolling in, spend the money, and find comfort in the fact that you have a plan in place that has stood the test of time.   Be Blessed,   Dave